'Vital that savers know' Britons warned of tax bill up to 45% on early pension withdrawals

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'Vital that savers know' Britons warned of tax bill up to 45% on early pension withdrawals

As the cost of living crisis continues and energy bills rise, many people may be considering taking out money from their pensions to fund their liv

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As the cost of living crisis continues and energy bills rise, many people may be considering taking out money from their pensions to fund their lives now. However with inflation sitting at nine percent, and income tax rates applied, Britons are urged to be careful as their money will decrease but also lose value early on in their retirement.

Express.co.uk spoke exclusively with Liam Chapman-Lyes, chartered paraplanner at Succession Wealth, on the pitfalls that savers should know before accessing their defined contribution pensions.

He said: “Accessing defined contribution pensions could lead to income tax rates of up to 45 percent, so it is therefore vital that savers know the pitfalls or seek professional advice from a qualified Financial Planner.

 “Accessing defined contribution pensions from age 55 when done correctly can allow many savers to retire early or enter phased retirement while still working or reducing their hours. 

“This can be life changing, but it is important savers are fully aware of the pitfalls.”

READ MORE: Martin Lewis shares the ‘best thing’ to do with inheritance money

Defined contribution pensions are usually the most common and people can take 25 percent of their pension free of income tax. 

Usually this is done by taking a quarter of the pot in a single lump sum, but it is also possible to take a series of smaller lump sums with 25 percent of each one being tax-free.

The income people might get from a defined contribution scheme depends on factors including the amount they pay in, the fund’s investment performance and the choices they make at retirement.

Currently it can be accessed by age 55, however this may rise.

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Mr Chapman-Lyes explained that if savers continue to work, they should be in workplace schemes that contribute into their pension.

If savers have accessed any income from their defined contribution pension – that is after they have taken their tax-free cash – then they would have a reduced MPAA from £40,000 to £4,000 per annum. 

He added: “This could lead to disappointment as savers could lose out on free cash from their employer towards their retirement.

“Since the pensions freedom legislation came into force in April 2015, savers have been able to flexibly access their defined contribution pensions from age 55, increasing to 57 from April 2028.

“Many savers should be aware of this change and if appropriate to do so, plan to access their pensions accordingly to avoid waiting an extra two years.”



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